Mastering Customer Acquisition Cost: A Key to Ecommerce Success
In the world of marketing, figuring out how to wisely allocate your budget can make or break your business. Knowing your customer acquisition cost (CAC) can give you valuable insights into the efficiency of your marketing campaigns and help you make better decisions to optimize your spending. In this article, we’ll explore what CAC is, why it’s essential to track, how it varies among industries, and how to calculate it using data from Shopify’s original content.
Bottom Line: If you’re an ecommerce business owner or manager, understanding and optimizing your customer acquisition cost (CAC) is crucial for making smarter marketing decisions, budgeting efficiently, and ultimately growing your business.
What is Customer Acquisition Cost (CAC)?
Customer acquisition cost (CAC) is the cost of gaining a single new customer. It’s primarily composed of marketing spend, but production and labor expenses also contribute to the total. CAC is a vital metric for businesses because it allows you to quantify and evaluate the success of your marketing campaigns as well as the efficiency of additional operating costs. Ideally, you want a CAC that is significantly lower than the amount of money each new customer spends on your product or service.
The Importance of Tracking CAC
Monitoring your CAC can provide insights into your business’s efficiency. If your CAC is consistently less than the money your new customers spend on your products, you can feel confident that your marketing is worth the expense. However, if your CAC is consistently higher than the money your new customers spend, you may need to find ways to reduce your CAC, usually by evaluating your marketing costs.
Understanding LTV to CAC
A good CAC depends on factors such as industry, business size, target audience, and goals. Many successful companies evaluate their CAC against customer lifetime value (LTV), which quantifies the income a customer brings to your business for the duration of their relationship with it. A common target LTV-to-CAC ratio is 3-to-1, meaning the lifetime income from a single customer should be three times more than the cost of acquiring that customer.
Customer Acquisition Cost By Industry
CAC varies significantly by industry. Based on data Shopify collected in 2021, here are some average annual CACs for ecommerce brands with fewer than four employees:
- Arts and entertainment: $21
- Health and beauty: $127
- Fashion and accessories: $129
- Home, furniture, and garden: $129
- Electronics: $377
Remember that these numbers are averages and should be considered as ballpark figures rather than precise numbers.
How to Calculate Your CAC
Here are four steps to calculate CAC for your company:
- Determine marketing spend for a particular period of time
- Identify how many customers you gained
- Divide marketing spend by new customers
- Consider factoring in your other costs
By carefully examining your CAC, you can make more informed decisions about your marketing budget and look for ways to reduce it if needed. This will ultimately lead to a healthier and more profitable ecommerce business.